Comment by jacquesm | Hacker News Reader

Comment by jacquesm | Hacker News Reader

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It's funny how the first round of funding apparently more or less requires you to accept the second otherwise you're 'unethical'. That's just plainly wrong. Either you get to decide round-by-round what the best option for you and your company is or it should simply be one round.

To give a bit of seed capital, wait to see what flies (and thus is very much de-risked) and then to force an additional round requiring dilution and board members that may simply be luggage to haul around should be up to the present day shareholders. The University is playing a dirty game here.

A friend of mine was in a similar situation, first round of funding was peanuts, second round - after substantial input in time, funds and efforts of the founders - on much less good terms (and effectively still peanuts) including board members and so on.

These are known as 'pro-rata' rights, which entitle earlier stage investors to participate in later rounds in order to maintain their stake in the company. These are relatively well-established rights that you will likely find in most VC term sheets.

Pro-rata rights are, to some extent, a reward for the risk that the investors take in investing in a very early stage startup. They also ensure that early-stage investors remain invested in your company; without a pro-rata right, the absolute gain of your company exiting at $100M vs $500M is much lower for the investor with a small stake. In a similar vein, the protections protect the investor from being diluted out of any significant stake in your company.

Sure, I'm familiar with that. But there is no such thing as a demand that a later round actually takes place.

That's up to the shareholders and if they don't want to raise another round because they don't like the terms then they don't.

It's not an obligation.

Ok, yeah, demanding subsequent rounds against founders' wishes is pretty mean. I guess you usually need investor approval to raise further rounds, but this would be taking that right of refusal much farther.

Well, right or wrong, it's probably ill-advised to play fast and loose with what's university money vs your private money while turning down a follow-on investment from the university.

Why? If they don't want to run the risk of you not accepting round #2 they shouldn't give you round #1 in the first place.

Either that or write better terms.

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